KEYSTONE XL

Greens fume at State's bet on oil sands as the new Bakken

Elana Schor, E&E reporter

EnergyWire: Tuesday, February 11, 2014

The State Department softened some of its sunniest growth predictions for Canadian oil sands by rail in its final environmental review of Keystone XL -- but greens still warn that only analysts in rose-colored glasses could see trains as a viable substitute for the pipeline.

Underpinning State's outlook for rail shipments of oil sands, the foundation of its prediction that KXL would not wreak climate havoc, is a judgment that the heavy bitumen of Alberta can follow the tracks of light Bakken crude now taking the train in record-high volumes. Energy Information Administration chief Adam Sieminski bolstered that argument in a year-old memo to State, writing that "the Bakken experience suggests that the absence of pipeline take away capacity will not forestall profitable production projects."

Environmentalists view the Bakken-to-oil-sands comparison as more apples-to-bananas than apt. They note that shipping the tarry crude destined for KXL requires more length of track, presents trickier construction challenges and calls for special tank cars in order to keep costs competitive with pipelines.

Running oil sands by rail "is proving to be more of a challenge than the models might predict, and that's why we haven't seen the same jump in crude-by-rail numbers that we've seen in the Bakken," Natural Resources Defense Council attorney Anthony Swift said in an interview.

"There's a reason why Bakken producers are turning down pipeline proposals and moving crude by rail, whereas tar sands producers are really lobbying hard for pipeline proposals and only investing in small amounts of rail," added Swift, of NRDC's international program.

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Keith Stewart, a Greenpeace Canada climate campaigner focusing on crude by rail, jabbed State's justification of trains' ability to fill in for KXL as "more like a hope and a prayer than actual analysis."

The department's final environmental impact statement (EIS) offered a concession to KXL opponents, assuming that all major pipeline proposals out of the oil sands are blocked before asking whether rail could keep pace with the Canadian industry's plans to grow from 1.8 million barrels per day in 2012 to 5.2 million bpd in 2030.

The EIS then points to robust growth in rail infrastructure expansion in 2013 and an even bigger increase on the horizon for this year. Western Canadian oil-by-rail loading swelled to more than 400,000 bpd last year, State wrote, and corresponding facilities in the Gulf Coast to offload crude topped 1 million bpd as 2014 began.

Yet Gulf Coast refiners processed less than 100,000 bpd of heavy Canadian crude from rail, pipeline and other transportation modes in November, the most recent month for which the Energy Information Administration discloses company-level oil movements, according to an EnergyWire analysis.

Whether the Gulf can develop enough infrastructure to process volumes of oil sands crude comparable to the 700,000-plus daily barrels that KXL would carry might appear to be a useful point of comparison for the EIS, given that the pipeline is aimed at feeding refineries on one particular coast. But State's pipeline-constrained scenario looks at heavy Canadian fuel that could travel on rail south to any number of destinations, including West and East Coast refineries where oil trains are more economically viable -- a less cut-and-dried endgame for an increasingly complex transportation market (EnergyWire, June 14, 2013).

In crafting that hypothetical aftermath of a KXL denial, the department made a notable concession in the 11 months since its latest draft EIS on the pipeline. After taking considerable heat from environmentalists for projecting that rail would carry as much as 200,000 bpd of heavy Canadian crude to the Gulf by the end of last year, the department tempered its final projection to say that 180,000 bpd of both light and heavy oils took the train from Canada to all destinations in 2013.

The final EIS also points to several outcomes that could upset its muscular vision for oil sands by rail, including crude prices below about $75 per barrel and the regulatory uncertainty surrounding new tank cars for crude shipment.

"They built their entire argument on climate on a very weak foundation of 'rail can do this,'" Stewart said of the State Department's "magical thinking." Considering the "infrastructure problems, economic challenges" and increasing concern in local communities about the impacts of the crude-by-rail boom, he added, "that is a weak base to build your case."

High costs and new rules

The arcane and data-driven debate over trains' ability to do the job of massive pipelines became integral to greens' case against the project over the past 18 months, as a growing list of corporate rail expansion plans appeared to bolster State's prediction that KXL would not make or break the oil sands.

High on that roster is Canexus Corp.'s plans for the first western Canadian terminal dedicated to oil-sands-only "unit trains," which can shave off as much as $4 per barrel in transport costs. Canexus acknowledged last month that the costs for its Bruderheim terminal had jumped by 40 percent from its previous estimates as it revised an initial goal of 50,000 bpd loaded in December to 30,000 bpd loaded in February.

Canexus vowed to keep to its long-term plans to carry 100,000 bpd out of Bruderheim by this fall. Still, the ability of companies to hew to their expansion goals is a vital aspect of State's case for oil sands by rail filling a KXL-sized gap.

Infrastructure for oil sands crude loading and storage "would have to be constructed at a much larger scale [than current levels] to accommodate all projected oil sands growth," State wrote in the EIS, necessitating "substantial capital investments on the order of hundreds of millions of dollars, or even billions of dollars, over several years."

The department bolstered its conclusion that such a build-out would be "within the capabilities of the industry if the economics justified it" by citing the existence of two large fuel storage terminals in the Gulf Coast, neither of which is suitable for handling heavy Canadian crude.

In addition to the industry's ability to push its heavy Canadian crude handling capabilities ever higher -- the EIS appears to examine capacity growth for oil sands, as opposed to actual shipment growth -- the potential for rail to do the job of KXL also could hinge on the quick erasure of the current backlog in tank cars suited for fuel.

If the Transportation Department's current proposed rule for tank car safety becomes permanent, industry compliance costs could add 30 cents to the cost of railing each barrel of crude, State concluded. That bill could increase by "an order of magnitude" in the short term, however, if removing aging tank cars from service leads to a shortfall in available equipment.

At least one refiner, Tesoro Corp., is already taking extra precautions by upgrading its own dedicated tank car fleet in advance of any finalized DOT rules (EnergyWire, Feb. 7).

Whether environmentalists and other KXL foes can successfully question State's oil-sands-by-rail assumptions during the next phase of the pipeline's review, an open-ended "national interest determination" period that encompasses economics and geopolitics, remains to be seen. But climate activists continue to hammer at every utterance by Canadian government officials and industry executives that underscores KXL's singular importance to oil sands production, suggesting the battle is far from over.

"If there's one thing we know about oil sands, it's that everything costs more than initial projections," Stewart said.

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